10-Q 1 form10q063001.txt FORM 10-Q DATED 6/30/01 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Quarterly Period Ended June 30, 2001 OR [ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the Transition Period from ............... to ............... Commission File Number 0-19407 LASER-PACIFIC MEDIA CORPORATION (Exact name of registrant as specified in its charter) Delaware 95-3824617 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 809 N. Cahuenga Blvd. Hollywood, California 90038 (323) 462-6266 (Address, including zip code and telephone number, including area code of principal executive offices) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The number of shares outstanding of each of the registrant's classes of common stock, as of July 31, 2001 was 7,178,595 shares of Common Stock, $.0001 par value. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Table of Contents

Part I. Financial Information Item 1. Condensed Consolidated Financial Statements LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Condensed Consolidated Balance Sheets (Unaudited)

See accompanying notes to the condensed consolidated financial statements. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Operations (Unaudited)

See accompanying notes to condensed consolidated financial statements. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Condensed Consolidated Statements of Cash Flows (Unaudited)

See accompanying notes to condensed consolidated financial statements. LASER-PACIFIC MEDIA CORPORATION AND SUBSIDIARIES Notes to Condensed Consolidated Financial Statements (Unaudited) (1) Basis of Presentation In the opinion of management, the accompanying unaudited condensed consolidated financial statements contain all adjustments (consisting of normal recurring items) necessary to present fairly the financial position of Laser-Pacific Media Corporation ("the Company") and its subsidiaries as of June 30, 2001 and December 31, 2000; the results of operations for the three and six month periods ended June 30, 2001 and 2000; and the statements of cash flows for the six month periods ended June 30, 2001 and 2000. The Company's business is subject to the prime time television industry's typical seasonality. Historically, revenues and income from operations have been highest during the first and fourth quarters, when production of television programs and demand for the Company's services is at its highest. The net income or loss of any interim quarter is seasonally disproportionate to revenues because selling, general and administrative expenses and certain operating expenses remain relatively constant during the year. Therefore, interim results are not indicative of results to be expected for the entire fiscal year. In accordance with the directives of the Securities and Exchange Commission under Rule 10-01 of Regulation S-X, the accompanying consolidated financial statements and footnotes have been condensed and do not contain certain information included in the Company's annual consolidated financial statements and notes thereto. (2) Net Income per Share Net income per basic and diluted shares is based upon the weighted average number of common shares outstanding. Basic net income per share is computed as net income divided by the weighted-average number of common shares outstanding for the period. Diluted shares outstanding represents the total of common shares outstanding as well as those options and warrants where the exercise price was below the average closing stock price, during the three and six month periods ended June 30, 2001 and 2000. Diluted income per share reflects the potential dilution that could occur from common shares issuable through stock-based compensation plans including stock options, restricted stock awards, warrants and other convertible securities using the treasury stock method. The following summarizes the computation of basic net income per share and diluted income per share:

(3) Income Taxes For the six months ended June 30, 2001, federal income tax expense of $363,000 and state income tax expense of $182,000 was recognized after the application of net operating loss carry forwards. Income tax expense for the six months ended June 30, 2001 was computed using the estimated effective tax rate to apply for all of 2001 after considering the impact of net operating loss carry forwards and tax credits. The rate is subject to ongoing review and evaluation by management. The Company may change the estimated effective tax rate in the third quarter of 2001. Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Statements included within this document, other than statements of historical facts, that address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as business strategy and measures to implement strategy, competitive strengths, goals, expansion and growth of the Company's business and operations, plans, references to future success and other such matters, are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended and Section 21E of the Securities and Exchange Act of 1934, as amended, and fall under the safe harbor. The forward-looking statements are based on certain assumptions and analyses made by the Company in light of its experience and its perception of historical trends, current conditions and expected future developments as well as other factors it believes are appropriate in the circumstances. However, actual results and financial position could differ materially in scope and nature from those anticipated in the forward looking statements as a result of a number of factors, including but not limited to, the Company's ability to successfully expand capacity, general economic, market or business conditions; the opportunities (or lack thereof) that may be presented to and pursued by the Company; competitive actions by other companies; changes in laws or regulations; investments in new technologies; continuation of sales levels; the risks related to the cost and availability of capital; and other factors, many of which are beyond the control of the Company. Consequently, all of the forward-looking statements made in this report are qualified by these cautionary statements and there can be no assurance that the actual results or developments anticipated by the Company will be realized or, even if substantially realized, that they will have the expected consequences to or effects on the Company or its business operations. Readers are urged to carefully review and consider various disclosures made by the Company in its filings with the Securities and Exchange Commission to advise interested parties of certain risks and other factors that may affect the Company's business and operating results. Results of Operations Revenues for the six months ended June 30, 2001 increased to $17,508,000 from $15,104,000 for the same year-ago period, an increase of $2,404,000 or 15.9%. The increase in revenues is attributable to increased demand for the Company's services with a significant increase in demand for digital compression services. The increase in revenues was partially offset by a decrease in revenues of $140,000 from film processing resulting from increased use by some customers of film formats that require a lower volume of film processing and a decrease in revenues of $104,000 from laser disc services. Revenues for the quarter ended June 30, 2001 increased to $7,581,000 from $5,858,000 for the same year-ago period, an increase of $1,723,000 or 29.4%. The increase in revenues is attributable to increased demand for the Company's services. The increase in revenues was partially offset by a decrease in revenues of $54,000 from laser disc services. Operating costs for the six months ended June 30, 2001 were $12,758,000 versus $11,712,000 for the year-ago period, an increase of $1,046,000 or 8.9%. The increase in operating costs is primarily the result of an increase in labor cost of $438,000, an increase in depreciation of $155,000, an increase in rawstock cost of $138,000 and an increase in outside services of $112,000. The increase in operating costs was partially offset by a decrease in bad debt expense. Higher labor costs were the result of compensation increases and increased hours worked, as a result of increased sales. The increase in depreciation is due to equipment purchases in prior years for business expansion. Tape stock increased as the result of increased sales. The increase in outside services is primarily due to the cost of digital transmission of work performed for customers located in remote locations. Total operating costs, including depreciation, as a percentage of revenues for the six months ended June 30, 2001 were 72.9% compared with 77.5% for the same year-ago period. Operating costs for the quarter ended June 30, 2001 were $5,960,000 versus $5,421,000 for the year-ago period, an increase of $539,000 or 9.9%. The increase in operating costs was primarily the result of an increase in labor costs of $267,000 and an increase in depreciation of $95,000. Operating costs increased in most areas due to higher revenues. Higher labor costs were the result of more hours worked, as a result of increased sales. The increase in depreciation is due to equipment purchases in prior years for business expansion. Total operating costs, including depreciation, as a percentage of revenues for the three months ended June 30, 2001 were 78.6% compared with 92.5% for the same year-ago period. For the six months ended June 30, 2001, the Company recorded a gross profit of $4,750,000 compared with $3,393,000 for the same year-ago period, an increase of $1,357,000 or 40.0%. The increase in gross profit is the result of fixed cost leveraged over the increase in revenues, discussed above. For the quarter ended June 30, 2001 the Company recorded a gross profit of $1,620,000 compared to a gross profit of $437,000 for the same year-ago period, an increase of $1,183,000 or 270.4%. The increase in gross profit is the result of the significant increase in revenues, explained above without a proportionate increase in operating costs. Revenues increased 29.4% while operating costs increased 9.9% as compared to the same year-ago period. Selling, general and administrative ("SG&A") expenses for the six months ended June 30, 2001 was $2,369,000 compared to $2,263,000 during the same year-ago period, an increase of $106,000 or 4.7%. The most significant increase in SG&A was in professional services. The increase was partially offset by reductions in tax and licenses and other expenses. The increase in professional services is due to an increase in investor advisory services, legal fees and consulting fees for Internet application. SG&A for the quarter ended June 30, 2001 was $1,163,000 compared to $1,114,000 during the same year-ago period, an increase of $49,000 or 4.4%. The increase in SG&A was primarily due to an increase in professional services of $114,000 and an increase in labor cost of $33,000. The increase was partially offset by reductions in tax and licenses and other expenses. The increase in professional services is due to investor advisory services, legal fees and consulting fees for Internet application. The increase in labor cost is due to compensation increases. Interest expense for the six months ended June 30, 2001 was $545,000 compared to $692,000 for the same year-ago period, a decrease of $147,000 or 21.2%. The decrease in interest expense is a result of lower interest rates and a reduction of long-term debt. Interest expense for the quarter ended June 30, 2001 was $277,000 compared to $347,000 for the same year-ago period, a decrease of $70,000 or 20.1%. The decrease in interest expense is a result of lower interest rates and a reduction of long-term debt. Other income for the six months ended June 30, 2001 was $181,000 compared to $130,000 for the same year-ago period, an increase of $51,000 or 39.1%. Other income is primarily interest income. The increase in other income is the result of higher cash balances, which earned greater interest income. Other income for the quarter ended June 30, 2001 was $104,000 compared to $63,000 for the same year-ago period, an increase of $41,000 or 64.9%. Other income is primarily interest income. The increase in other income is the result of higher cash balances, which earned greater interest income. Liquidity and Capital Resources During the quarter ended June 30, 2001, the Company and its subsidiaries entered into a non-asset based credit facility with Merrill Lynch Business Financial Services. The maximum credit under the agreement is $8 million. The loan agreement provides for borrowings of up to $6.0 million under a revolving loan and a $2.0 million equipment term loan. There was no outstanding balance of the revolving loan at June 30, 2001. The equipment loan had an outstanding balance of $1,601,000 at June 30, 2001. Borrowings under the equipment term loan were used to pay off debt under a loan agreement with The CIT Group. The revolving loan and the equipment term loan are payable monthly and bear interest at the 30-day dealer commercial paper rate plus 2.2%. The revolving loan is for a one-year term and can be renewed annually. The equipment term loan is for a five-year term. As of June 30, 2001 the Company had outstanding equipment loans and capital lease obligations of approximately $10.7 million with various lenders (including the equipment term loan discussed above) in connection with the acquisition of equipment. The capital leases are for terms of up to 60 months, at fixed interest rates ranging from 7.5% to 12.75% and one equipment term loan with a variable interest rate discussed above. The obligations are secured by the equipment that was financed. The equipment was acquired to expand the Company's capabilities and to support the increasing demand for the Company's services. During the quarter ended June 30, 2001, the Company purchased 825,200 shares of its common stock in a private transaction for $2,063,000. The Company's principal source of funds is cash generated by operations. The Company anticipates that existing cash balances, availability under existing loan agreements and cash generated from operations will be sufficient to service existing debt and to meet the Company's capital requirements for fiscal 2001. Other Matters On July 9, 2001, the Company entered into an agreement with its joint venture partner in Composite Image Systems, LLC ("CIS"), to sell its interest in CIS to its joint venture partner. Under the terms of the agreement, the Company transferred to its joint venture partner the Company's 50% interest in CIS and certain equipment previously leased to CIS in exchange for a cash payment of $575,000. CIS will remain obligated on certain equipment leases, which currently have a principal obligation of approximately $400,000. The Company has given corporate guarantees regarding those leases, and CIS and its joint venture partner have agreed to indemnify the Company up to the amount of the principal obligation for any claims that might arise under the guarantees should CIS default on the equipment leases. The transaction net of related cost and expenses should yield a pre-tax gain of approximately $90,000 in the quarter ending September 30, 2001. Seasonality and Variation of Quarterly Results The Company's business is subject to substantial quarterly variations as a result of seasonality, which the Company believes is typical of the television post-production industry. Historically, revenues and net income have been highest during the first and fourth quarters, when the production of television programs and consequently the demand for the Company's services is at its highest. Revenues have been substantially lower during the second and third quarters. The Company historically has incurred operating losses during the second quarter. Item 3. Quantitative and Qualitative Disclosures about Market Risk Derivative Instruments. The Company does not invest, and during the six months ended June 30, 2001 did not invest, in market risk sensitive instruments. Market Risk. The Company's market risk exposure with respect to financial instruments is subject to changes in the "30-day dealer commercial paper" rate in the United States. The Company had borrowings of $1,601,000 at June 30, 2001 under a term loan (discussed above) and may borrow up to $6.0 million under a revolving loan. Amounts outstanding under the term loan and revolving credit facility bear interest at the 30-day dealer commercial paper rate plus 2.2%. Part II. Other Information Item 4. Submission of Matters to a Vote of Security Holders At the Company's Annual Meeting of Shareholders held on June 15, 2001, the following individuals were elected to the Company's Board of Directors: Votes For Votes Withheld Emory M. Cohen 7,132,465 11,091 Thomas D. Gordon 7,127,615 15,941 Craig A. Jacobson 7,129,515 14,081 David C. Merritt 7,130,515 13,041 James R. Parks 7,121,428 22,128 Item 6. Exhibits and Reports on Form 8-K (a) Exhibits 10.9 Merrill Lynch Business Financial Services Credit Agreements dated June 5, 2001. (b) Reports on Form 8-K Filed June 22, 2001 reporting the repurchase of shares of the Company's common stock held by Digital Creative Development Corporation. Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. LASER-PACIFIC MEDIA CORPORATION (Registrant) Dated: August 7, 2001 /s/ James R. Parks James R.Parks Chief Executive Officer Dated: August 7, 2001 /s/Robert McClain Robert McClain Chief Financial Officer (Principal Financial and Accounting Officer)

LASER PACIFIC MEDIA CORP 10-Q